Stocks Euphoria in India Draws Warning From Top-Performing Fund

Sailesh Raj Bhan has become wary of the exuberance surrounding Indian stocks as a $790 billion rally since late March rambles on.

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Sailesh Raj Bhan has become wary of the exuberance surrounding Indian stocks as a $790 billion rally since late March rambles on.

The chief investment officer at Nippon Life India Asset Management Ltd. says it’s increasingly difficult to find opportunities in the $3.8 trillion market, where benchmarks have just hit record highs. That’s after a focus on high-conviction bets at reasonable prices helped place three of his firm’s equity funds among this year’s 10 top-performing Indian mutual funds, the strongest showing among peers.

“You are in a market where if you think about a stock from an investment point of view, it rises 40% before you even decide to buy it,” Bhan told Bloomberg News in an interview at his Mumbai office. “That is clearly reflective of froth,” said Bhan, who oversees the equivalent of $17.4 billion in equity assets under management.

READ: A $775 Billion India Stock Rally at Risk as Small Caps Overheat

Bhan, a graduate in genetics with a masters degree in business administration, is particularly worried about the boom in small- and mid-cap stocks. His comments come as some strategists have been sounding alarms over the relentless surge in these shares, which is driven in part by India’s retail investing boom.

The Nifty Smallcap Index and the Nifty Midcap Index have each jumped about 30% year-to-date. The benchmark NSE Nifty 50 Index has risen over 11%, beating broader gauges of Asian and emerging-market stocks by at least six percentage points. 

Global funds piled a net $17 billion into the nation’s equities in the first eight months of this year as optimism over growth in the economy and corporate earnings, along with persistent weakness in China, boosted the market’s appeal. They have been sellers of local stocks so far in September.

“It’s very simple — this euphoria is the single biggest risk because you are mis-allocating capital at these times,” he said, adding that investors are making decisions with “emotions over logic.”

READ: ‘Irrational Exuberance’ Driving India Mid-Caps, Strategist Says

Early wagers on state-backed manufacturing and banking shares have helped the Nippon India Multi Cap Fund, the largest among those managed by Bhan, beat 96% of peers in 2023 and 91% over the past five years, according to data compiled by Bloomberg.

While Bhan claims that some of his fund house’s bets on manufacturing and some bank stocks have yielded five or 10 times their initial investments these last few years, they are now trimming positions to find “sensible value” elsewhere.

“We have to the transition to pockets of the market where we think there is value,” he said. The asset manager now prefers large-caps in sectors like pharmaceuticals, utilities and consumer staples.

Meanwhile, the rally in Indian stocks is certainly making companies and their shareholders more willing to tap the market for funding. The nation will see at least $30 billion raised annually through primary and secondary share sales in 2024 and in the years to come, according to JPMorgan Chase & Co., which is the top manager of equity and rights offerings in India in the first eight months of 2023, according to data compiled by Bloomberg League Tables.

READ: Modi Enjoys a $3.8 Trillion Market Moment as G-20 Leaders Fly In

–With assistance from Ashutosh Joshi.

(Adds JPMorgan estimate on share sales in the last paragraph. An earlier version corrected the name of the equity product in the eighth paragraph.)

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